January has been off to an interesting start. Lanny has crushed it with his stock purchases over the last 30 days, adding some serious dividend income to his total. Me, not so much. I’ve been on the sidelines for a while now and talked about how frustrated that was making me in my last dividend income summary. Now, that’s no longer the case and I’ve finally made my first stock purchase of 2019. As the title suggests, I purchased shares of Dominion Energy recently and here are some of the main reasons why.
The other day I sent out a Tweet teasing a stock purchase. You guessed it, this was the “mystery” purchase that I could not wait to write about.
Purchased 14 shares of a stock yesterday, adding over $50 in annual dividend #income. Article to follow soon, but excited to be back in the action in 2019! -b
— Dividend Diplomats (@DvdndDiplomats) January 15, 2019
Why dominion energy?
So why Dominion Energy (D)? There were several reasons why the company was once again on my radar. Yes, I added shares in 2018 to my wife’s Roth IRA. However, this purchase was made in my regular brokerage account. Following Lanny’s lead last year (like most things for that matter), I am going to work on building the dividend income in my regular brokerage account. Before running the company through the Dividend Diplomats Stock Screener, here were a couple of recent announcements about Dominion that had me excited me about the company going forward.
Completion of the SCANA Merger – The company announced the merger early in 2018. However, there were some major regulatory hurdles to clear before the acquisition could proceed. The hurdles resulted in Dominion offering steeper rate cuts for customers, impacting their future revenue. However, as discussed in an article in Yahoo! Finance, the concessions that were made to obtain regulatory approval of the deal were lighter than other deals in the past (a nice positive).
On top of it, even with the rate concessions, the projected earnings growth from the deal did not change. The company estimated that the deal would be immediately accretive to the company and provide 6%-8% annual earnings growth over the next decade. The article cites that outside analysis are projecting closer to 3% annual growth. But even their estimates did not change per the article. Now, the merged company is larger and Dominion has once again expanded its footprint.
Dividend Increase – The dividend increase was icing on the cake and a great sign for shareholders after the completion of the merger. If the rate recessions to customers were going to significantly reduce the company’s cash flow, surely the company wouldn’t have announced a large dividend increase for 2019, right? That’s why when the company announced a 10% dividend increase in December, I was pretty pumped up. Further, in addition to increasing their dividend after the acquisition, it was nice to see that the dividend increase was announced amidst a turbulent time in the market (mid-December). Management could have easily changed course based on the broader market environment. But instead, the decided to forge ahead with their plan. Love it!
dividend diplomats’ stock screener
With the completion of the merger and the dividend increase behind us, it is time to run Dominion Energy through the Dividend Diplomats’ Stock Screener. Our simple stock screener helps identify potentially undervalued dividend growth stocks. For the purposes of this analysis, I will use my purchase price of $68.28/share, average $4.29/share, and an annual dividend of $3.67/share (post-dividend increase).
Metric #1: P/E Ratio Less than the S&P 500 – 15.91X – The S&P 500 typically trades in the low 20X earnings (using trailing earnings) and in the high teens/low 20X (using forward earnings). Since we look to find undervalued dividend growth stocks, it is pretty important to us that we only look into stocks that are trading at a multiple below the broader market. Dominion clearly passes this metric.
Metric #2: Payout Ratio Less than 60% – Typically, we look for companies that have a dividend payout ratio below 60%. This is the sweet spot, with exceptions of course, that will allow the company to continue growing their dividend without sacrificing the safety of the dividend. Naturally, Dominion falls into the exception category. This is because there are certain industries (such as utilities, certain oil, etc.) where the industry standard is to have a >60% payout ratio. Thus, the fact that Dominion’s dividend payout ratio is 85% didn’t cause me to run for the hills. Now, with that being said, if the acquisition is not accretive and causes earnings to decrease going forward, there may be an issue. However, assuming earnings growth, I am not concerned about this metric at the moment.
Metric #3: Increasing Dividends – We love companies that increase their dividend. Heck, that’s the name of the game for the Diplomats and those looking to create a passive, growing dividend income stream. I’ve already mentioned it a few times that Dominion just announced a dividend increase in December. So that is old news by this point. However, what is important that the company has increased their quarterly dividend for 16 consecutive years! They aren’t quite a Dividend Aristocrat, but they are over halfway there. A nice check here for Dominion.
Summary – The stock purchase
Based on the nice recent news and the company’s performance in our stock screener, I was ready to buy. Thus, I purchased 14 shares of Dominion. This added $51.38 in dividend income to my annual total. My wife owns 50.564 shares. Now, we will receive over $235 in dividend income from the utility company. What’s nice is that Dominion is our gas utility. So at least we are receiving a dividend from the company that we are paying monthly for our gas services!
What are your thoughts about my purchase? Are you as excited about Dominion as I am? If not, what other company would you have invested in instead? Is there a different utility company on your radar?